Date: 2016
Type: Article
Dealing with financial instability under a DSGE modeling approach with banking intermediation : a predictability analysis versus TVP-VARs
Journal of financial stability, 2016, Vol. 26, pp. 216-227
BEKIROS, Stelios D., CARDANI, Roberta, PACCAGNINI, Alessia, VILLA, Stefania, Dealing with financial instability under a DSGE modeling approach with banking intermediation : a predictability analysis versus TVP-VARs, Journal of financial stability, 2016, Vol. 26, pp. 216-227
- https://hdl.handle.net/1814/44652
Retrieved from Cadmus, EUI Research Repository
In the dynamic stochastic general equilibrium (DSGE) literature there has been an increasing awareness on the role that the banking sector can play in macroeconomic activity. We present a DSGE model with financial intermediation as in Gertler and Karadi (2011). The estimation of shocks and of the structural parameters shows that time-variation should be crucial in any attempted empirical analysis. Since DSGE modelling usually fails to take into account inherent nonlinearities of the economy, we propose a novel time-varying parameter (TVP) state-space estimation method for VAR processes both for homoskedastic and heteroskedastic error structures. We conduct an exhaustive empirical exercise to compare the out-of-sample predictive performance of the estimated DSGE model with that of standard ARs, VARs, Bayesian VARs and TVP-VARs. We find that the TVP-VAR provides the best forecasting performance for the series of GDP and net worth of financial intermediaries for all steps-ahead, while the DSGE model outperforms the other specifications in forecasting inflation and the federal funds rate at shorter horizons.
Additional information:
Available online 22 July 2016
Cadmus permanent link: https://hdl.handle.net/1814/44652
Full-text via DOI: 10.1016/j.jfs.2016.07.006
ISSN: 1572-3089; 1878-0962
Publisher: Elsevier
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